Brief Exercise 21-2 Date Account Titles and Explanation Debit Credit January 1,

Question

Brief Exercise 21-2

Date

Account Titles and Explanation

Debit

Credit

January 1, 2014

(To record the lease.)

January 1, 2014

(To record first lease payment

Brief Exercise 21-2

Waterworld Company leased equipment from Costner Company. The lease term is 4 years and requires equal rental payments of $42,716 at the beginning of each year. The equipment has a fair value at the inception of the lease of $147,100, an estimated useful life of 4 years, and no salvage value. Waterworld pays all executory costs directly to third parties. The appropriate interest rate is 11%.

Prepare Waterworld’s January 1, 2014, journal entries at the inception of the lease. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

January 1, 2014

(To record the lease.)

January 1, 2014

(To record first lease payment

Explanation / Answer

This is Capital lease transaction as lease period covers more than 755 of useful life of asset Journal Entries in the books of Waterworld Company Date Account title & Explanation Debit Credit January 1, 2014 Equipment 147100 Capital lease liability account 147100 (asset recorded at present value of lease payments / fair value) January 1, 2014 Capital lease liability account 42176 Costner Company 42176 (lease payment for 1st year payable) January 1, 2014 Costner Company 42176 Cash 42176 (Payment of 1st lease payment)

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